U.S. figures, revisions show economy doing even better than people thought

November 15, 1999

CHAPEL HILL - Late last month, the U.S. Department of Commerce's Bureau of Economic Analysis released revisions of the National Income and Product Accounts (NIPA), which somewhat altered the way it takes the nation's financial temperature.

"These revisions contain good news for all of us who are bullish about the U.S. economy and its long-term prospects and very bad news for all those pessimists who are always looking for an economic disaster around the corner," said Dr. James Smith, a University of North Carolina at Chapel Hill financial expert.

"Almost every good aspect of the economy turned out to be better than we had previously thought over the last 40 years and especially over the course of the current expansion. Almost every bad aspect of the economy turned out to be less bad than we had previously thought."

Smith is finance professor at UNC-CH's Kenan-Flagler Business School, chief economist for the National Association of Realtors and, according to The Wall Street Journal, the nation's most accurate economic forecaster twice in the past three years. He described the national and world economies in the December issue of "Business Forecast," a newsletter he writes for UNC-CH.

The NIPA revisions show U.S personal savings rates, for example, to be significantly better than they had been under previous definitions. Now, savings are defined simply as how much of total personal income is left after taxes and personal expenses and include such savings as vested government pensions.

"As is usually the case with these massive NIPA revisions, the Bureau of Economic Analysis found a lot of personal income that had not been counted previously," Smith said.

The new personal savings rate for the fourth quarter of 1998 is now 3.5 percent, and for the first quarter of 1999 it is now 3 percent, he said. Thus, the Great Depression year of 1933 remains the only one to record a negative personal savings rate, and U.S. consumers are not quite the spendthrifts many previously believed them to be.

"The news on real gross domestic product (GDP), the total value of all the goods and services produced ... in the United States after eliminating inflation, was even more terrific," Smith said. "...Not only has the economy been bigger than we thought every year for the past 40 years, it has been growing more rapidly than we thought it had."

For the current expansion, real GDP growth from the first quarter of 1991 to the second quarter of 1999 is now estimated to have averaged 3.5 percent a year, rather than the 3.1 percent previously published. Also, GDP price measures were revised downward.

"Inflation has been even less of a problem than we thought over this expansion," he said. On Jan. 16, "the current economic expansion will begin its 107th month, finally surpassing the old 106-month record of the expansion that began on Feb. 15, 1961 and ended on Dec. 15, 1969."

A recent Investment Company Institute and Securities Industry Association survey showed that 48.2 percent of all U.S. households either owned individual stocks or mutual fund investments in the first quarter of 1999.

"This was an 85 percent increase in the number of such households since 1983 and a huge change in the proportion, which was only 19 percent of households in 1983," he said. "The next such survey will probably show that the U.S. is the first country in the history of the world to have a majority of its households be capitalists. The total value of these holdings is around $13 trillion.

The short-term U.S. outlook remains excellent, Smith said.

"When you go to your New Year's Eve party this year, you can be confident that next year will be even better for the U.S. economy than 1999," he said. "Even though real GDP growth will be less than that for any year since 1993, it will still be growth to new records."

The total number of people employed will set more new records in 2000 and that will drive incomes and retail sales to new highs.

"Industrial production should set new records, driven partly by strong global demand that should see exports growing more rapidly than imports for a change and thus shrinking the trade deficit," the economist said.

The economic outlook for the European Union is improving, Smith said, while Japan's remains questionable.

The International Monetary Fund forecasts 1.5 percent real GDP growth for Japan in the year 2000, he said. Other forecasters are not so optimistic and predict no growth for the next five to seven years. A major complication, coupled with a low immigration rate, is that the average age of the population is rising more rapidly there than in any other country, probably because of Japan's recent dismal economic performance.

"No one expects Japan to ever again repeat its 1981-1990 average real GDP growth performance of 4.0 percent," Smith said.
Note: Smith can be reached at (202) 383-1184 or (919) 962-3176. As time allows, he's willing to discuss most economic issues with reporters. E-mail: jsmith@realtors.org Fax: (202) 383-7568.

Contact: David Williamson, (919) 962-8596.

University of North Carolina at Chapel Hill

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